Do You Know that 99% of the Warren Buffet’s wealth has come after which age? Any guesses? It’s 50 years. He wasn’t even a billionaire until 50 years ago. And do you know the magical reason behind this? Compound Interest. Yes, the same compound interest which we studied in the maths class of 7th or 8th standard. And we ignored it very easily. Compound interest is a very simple concept that can make you very rich in the long run if you want to sit and see how easily and quickly your money can grow. today we will learn about Warren Buffet’s success and learn about compound interest. And you will understand about how you can make your money 100-200x very easily.
So what is compound interest?
By definition compound interest is the interest calculated….. In school, we have learnt these kinds of definitions in the 7th or 8th class. And we also memorized the complex formula of this. But if we want to talk about compound interest in simple terms, compound interest means the interest you get on the money you have invested in compound interest, you also get interest on that interest. What just happened? In simple terms, this is what compound interest is. That the money you invested, and what you earned out of it you get more money on that.
But how does this compound interest actually help in wealth generation?
Let’s understand this with the help of an example. Suppose, you are 25 years old and some how you managed to earn Rs. 10 Lakh and now you saw the “The Big Shot” movie and you decided to invest all your money into stock market. Now let’s assume that you will get 20% return every year. You put Rs. 10 Lakh in the market and you are getting 20% return every year. And you neither took that money out nor churned it. And now when you will be 55 years old so your Rs. 10 Lakh has now become 23.75 Crore. It means, from Rs. 10 Lakhs to Rs. 23.75Crores straight in 30 years. It means a return of 237 times. Is this some kind of a joke? This much money? This is the power of compounding.
If you invest your money and don’t do anything with it so compounding makes it to a good amount. Many of you regularly churn your portfolio you keep a eye on when the market will fall, buying the dip, and a lot of other things and maybe even after working hard, by investing time, you can not earn as much money as you can earn from compounding. You just need to have patience in this and nothing else. If you have patience, your money will compound in the long term. This is a very simple topic and what you have to do is, Invest your money. Start as early as you can. Do it consistently. And invest for a long term, that will be more beneficial. Looks like a sure shot that it straightaway became Rs. 24 Crores from Rs. 10 Lakhs.
So why don’t people do this? What problems do they face?
We will discuss that now. So people do not want to do this because to save Rs. 10 Lakhs in the age of 25 years to invest Rs. 10 Lakh in the market in leave it on for 30 years is a difficult task. To do nothing in investing is also an art. What we need is that in 1-2 years, our money should get double, triple, that we earn good returns and buy somethings out of it like fancy gadgets, cars. So that’s why concepts like Option Trading and Intra-Day are more popular than compounding. So no one wants to leave their money and invest it for 25-30 years.
Because they have to earn money quickly, spend money quickly and live their life. So, this is the difference between Warren Buffet and a normal investor. The one who thinks with a long term vision, about things they want to do in long-run and they invest their money based on those things. So it’s very important that apart from short-term, you keep in mind your long-term goals and your future and then you should invest your money. This will help you fulfill your short term needs and long term responsibilities also.
So, this is why compounding is also called as the 8th wonder of the world.
It is practical and it is historically proven as well. Let’s understand this now. Let’s talk little bit about the market’s history. BSE’s flagship index, which is SENSEX was listed at around 500 points in 1986. In the last 40 years, economy has seen a lot of negative events. An emergency came, Kargil War happened, Dot Com Bubble happened, 2008’s Global Financial Crisis, and the most recent is Covid-19 Pandemic. Even after all these events, today market is still at around 50,000 points. Market means SENSEX. From 500 to 50,000. In the last 40 years, market has grown a lot despite these negative events. So what can we infer from this? First being, humans move towards progress.
No matter what happens, the market will grow in the long-term. And the second is, this amount becomes compound. So if you had patiently left your money after investing at that time then today your Rs. 500 would have become up to Rs. 50,000. And the same thing will continue to happen in the future as well. So if you had invested Rs. 500 in SENSEX in 1986, then today in 2021 your Rs. 500would have become Rs. 50,000. And that equals to 100x. 100x in 35 years, not bad! As we discussed earlier, the point of the people remains that when the market falls, they will buy timing the market ,delaying their investments.
Suppose in 1990 some man would have said that I will invest when the SENSEX comes back to 500-600 points. So what would have happened to him? So, it’s important that you spend time in the market rather than timing the market. Let’s understand this with the help of an example of two friends. We have with us, a 22 year old Shubham and a 32 year old Raghav. Now at 22, Shubham thinks that he wants to plan for his retirement. So he thinks that now he will invest Rs. 50,000in the market every year for the next 10 years. So from 22 years to 32 years he invested Rs. 5,00,000 in the market. And after 32 years, he will leave the money in the market and never touch it again. Looking at Shubham, Raghav who is 32 years old, he also thought, that he will also invest in the market. He also started investing Rs.50,000 every year in the market. Raghav started at the age of 32 and he says that he will invest Rs. 50,000every year in the market for the next 30 years.
His total investment comes to Rs. 15,00,000. Shubham invested Rs. 50,000 from 22 to 32 years every year, and the total was Rs. 5,00,000. So now you guess who will have more money at the age of 62 years? With Shubham who started investing at the age 22, who put Rs. 5,00,000 in the market for 22 years to 32 years, or Raghav who started at the age of 32, who invested Rs,15,00,000 in the market for next 30 years in the lumps of Rs. 50,000. You can assume that they have got a rate of about 10%. At the age of 62, who will have more money? With Shubham. At the age of 62, Shubham will have 1.5 Crore. On the contrary, Raghav will have Rs. 90.4 Lakh. Why? Because Shubham started investing at an early age. Shubham had put money in the market for only 10 years, but Raghav had put money in the market for 30 years. Still, Shubham has almost Rs. 60 Lakhs more than Raghav. This is called the power of compounding.
Shubham started investing at the age of 22, so his money is compounding from 22 years to 62 years. While Raghav started at the age of 32, and his money is compounded10 years less than Shubham. This is the reason that if you start early and leave your money for compounding then your money can also grow in the long-term. Many of you must be thinking that we wish we were 22 years old now and we too would have started investing. I am also one of those people. But it’s not too late. If you are still reading this article and if you have properly understood the concept that we discussed then you are a sure shot a future millionaire. Investing is not difficult at all.
There is no time horizon for investment. If you thought today that you want to invest then you start investing. There is no restriction on the amount, you start with the amount you have. It should not be like I need Rs. 1,00,000or I have to start with Rs. 50,000 only. You can start investing even with Rs.100. But the point is that start investing as early as you can. So, now that you have become future millionaire so in exchange for that I just need you to share this article with your closed ones . People from young generations who have started earning or people who are in the age group of 15 to 25 who wants to start investing so you can share this article to them. And people older than you who don’t invest yet, share this article to them as well so that you can tell them, how compounding is a magical concept so people could take advantage of it and start earning money as soon as possible. That’s it for today.